You’ve done your research and now know that the best investment instrument that lets you plan your risk appetite and invest accordingly while giving you flexibility is Mutual Funds.
As you are now aware of the important aspects related to Mutual Funds, the next thing left for you to decide is – which Mutual Fund to invest in and on basis of what you would make this decision.
Knowing all of that is what we will be discussing today. Here are some pointers that would help you make the decision.
What are you investing for and how much risk are you ready to take?
Before making any investment think about what you need the return for. Do you want to pay off a loan with the returns or want to fund your retirement, which may be decades away? Identifying the goal will help you decide how much should you invest and for how long. Once you are through with finalizing a goal, think about your risk appetite.
Several factors may affect your ability to take a risk – how old you are, your income level, other financial commitments and most importantly your goal.
For instance, if you are in your 20s and have recently started investing and have a stable family background, then you can take bigger financial risks by investing in mutual funds with more equity-based portfolios that can help you earn higher returns; compared to a late investor, in their middle ages and with plenty of family responsibilities.
As explained in the example above, your risk appetite and goals will largely affect the choice of fund. Let us explore this further and draw from it the categories of mutual fund options available.
- Long-Term Capital Appreciation Fund
If the goal of an investor is to meet a long-term need and the investor is willing to take a fair amount of risk; then he/she can opt for a long-term Capital Appreciation Fund. Capital appreciation funds are funds that increase your asset value primarily by investing in high growth and value stocks. In this category of mutual funds, a large part of the asset is held in common stock that is stock traded in the market, more commonly known as shares.
Since these are high returns, high-risk funds they are also called aggressive growth funds. Some of the best performing Capital appreciation funds in the market today are – ICICI PruBluechip, L&T India Value and Reliance large Cap among others.
- Mid-Cap Fund
For an investor investing for a long period of time but in need of short-term pay-outs, an Income Fund strategy or a Mid-Cap fund is the best option. This category of mutual funds invests in a combination of government and corporate debt funds or dividend-paying stocks that provide steady income with established pay-out ratio commitments. Income funds are highly suitable for investors with a minimal risk appetite.
Some of the trending Income funds in the market today are the SBI Magnum Multi-cap Fund, HDFC Capital Builder Value and Franklin India Focused Equity among others.
- Balanced Funds
The third and final category is Balanced Funds. These types of mutual funds are for investors with medium risk appetite and generally invest in both stock and debts to maximize returns while balancing the risk.
Some of the top performing mutual funds in this category are ICICI Prudential, Balanced Advantage, MotilalOswal Dynamic, HDFC Balanced Fund and L&T India Prudence Funds among others.
You must also keep in mind the duration of investment, while almost all of the mutual fund categories discussed above performs well in long-term, that is, 10 years and above. The minimum tenure should not be less than 5 years to make the most of your investment.
What overheads will you have to pay?
Another important element to consider is the fee that mutual fund companies charge from the investors. It is important to understand this component as it can have serious repercussions on your annual revenue. Here are some types of fees that companies charge, for you to consider:
This fee is charged either at the time of purchase or sale of an instrument. One of the load fees is the back-end load fee, charged at the time of sale of an investment. Generally charged for sales made before the set time, it aims to deter the investors from buying and selling too often.
There are also some no-load funds, which do not charge a front or back-end load fee. However, they may have higher administration fee or management fee.
The best way to analyse the fee component is to see the management expense ratio in the mutual fund sale literature. The higher the ratio the lower your returns will be at the end of the year.
These are charged on the Daily Net Asset of a specific Mutual Fund. These expenses are deducted on a daily basis from the fund’s net assets and in the end; the NAV is announced after the adjustment of these expenses.
There are other factors like CRISIL rating and AUM (Asset under Management) that investors should explore before making the investment. Also, an investor should do a thorough research on specific mutual fund returns using an SIP Calculator. Investment in Mutual Funds may sound like a daunting task, but with due diligence, you can optimize your investment for maximum gains.